Dell and Salesforce.com: So cozy they could merge (someday)

Dell and Salesforce.com have quite a partnership going on. Dell is developing its internal and some of its external application on Salesforce.com's force.com platform. Salesforce.com is moving its data centers to Dell hardware. And the two are teaming up on marketing pitches. Meanwhile, the relationship appears to be much more strategic than just a customer-vendor partnership.

The big question: Is this Dell and Salesforce.com lovefest a prelude to a merger? It's not as crazy as it initially sounds. Dell has been partial to software as a service. Dell has to find some software and services strategy as rivals such as IBM and HP, now bulked up by EDS,  increasingly lump software, services and hardware into a joint sell. As for Salesforce.com a purchase by Dell would give it more clout in those large accounts it is increasingly chasing.

In other words, a Dell-Salesforce.com merger, which I've been pondering for a couple of weeks, could work. What's a better way to revamp services than for Dell to teach folks how to use SaaS to speed implementation times? No other consultant will offer a SaaS first strategy--it kills the cash cow of all the fees needed to implement those big software packages.

Here's my reading of the tea leaves:

Salesforce.com and Dell today

Details about the Salesforce.com and Dell relationship have been emerging in recent weeks. First, Salesforce.com CEO Marc Benioff said on his company's earnings conference call that Dell reupped a deal with the SaaS leader and will develop apps on the force.com platform.

Benioff said:

You know, what we originally started with Dell, as I’m sure you know, is we built the ideastorm.com website for them using our Ideas technology. We deployed the Salesforce automation system for them, for all of their sales force worldwide, which is a substantial organization. And then we also helped them enter the indirect channel through delivering the Dell wall, which is their partner portal based entirely on our partner relationship management technology. And then we saw them having interest in customer support. Then they came to Dream Force last year and got very excited about building on force.com and building custom applications. We also have been working with some of their key software providers to port some of the applications that they have internally natively onto force.com for them to use. And all of that together, suddenly we were one of their key technology vendors and it really gave them the ability to sign what we call an enterprise license agreement with us. And that is a three-year agreement that goes through 2011, and it is for their entire global workforce. And as I said, it is the largest transaction that we’ve done.

On Dell's earnings conference call, the company returned the favor. Regarding Salesforce.com Dell chief Michael Dell said:

Here we recently won a very large opportunity for our enterprise hardware and services that essentially replaces a proprietary Unix system from a key competitor, resulting in significantly lower cost and an easier-to-manage environment for the customer. The creation of this solution involved collaboration across our enterprise sales organization, high availability database and custom engineering teams, and our pro support services teams. We will bring up a new data center for them in Singapore that will run entirely on Dell from the start and our teams are collaborating with Salesforce to support the multi-vendor hardware and software stack that they require. Their U.S. production data centers that are currently adding new databases are going on Dell and those will migrate to Dell over time for the existing databases.

It's unclear what the dollar value of this deal was worth, but it appears that the Dell-Salesforce.com tie-up is much more strategic.

Dell gets SaaS-y but needs more

It's clear that Dell is comfortable with SaaS and recent acquisitions highlight the trend. SaaS plays into Dell's simplify IT message.

To wit:

• Dell has been pitching IT as a service and it's obvious that software will play a big role there.
• Dell hasn't been shy about software acquisitions buying MessageOne, Everdream and ASAP Software in the last year.
• Dell has also been big on cloud computing services. Is there a better cloud player out there than Salesforce?

At the Citigroup Technology Conference on Wednesday Michael Dell said that it is clear that "software and services will be important to our future.”

Competitive forces

Dell clearly sees itself as a so-called "total solutions" provider, but lacks the firepower to compete with HP/EDS on services and software. Ditto for IBM. Where will Dell get that heft? The opportunity is there, but Dell will need some kind of applications glue to be competitive.

At the Citigroup conference, Dell pooh-poohed the idea of a transformational merger and told analysts that they shouldn't hold their breath for a big deal. The question, however, is how Dell defines big. It wouldn't make sense for Dell to buy something like Accenture. But Salesforce.com wouldn't be too big to swallow.

Salesforce.com has a market cap of $6.53 billion as of today's opening price. Dell clocked in at $40.4 billion. Even if you assume Dell's bid was $10 billion it's not like the company couldn't handle it. And if Dell can use Salesforce.com to improve its gross margin picture Wall Street wouldn't scream (too much).

On the Salesforce.com side of the ledger the company is at the most critical juncture in a software company's life: The $1 billion revenue run rate. Salesforce.com has done a bang-up job getting this far, but that $1 billion mark has tripped up many software companies. The growth is harder to come by and Salesforce.com is moving upstream in order to keep growing.

And as Salesforce.com swims upstream it runs into Oracle and SAP--two giants with an army of foot soldiers and entrenched customer bases. Sure Salesforce.com can poach some accounts here and there, but at some point it will need to leverage bigger relationships--the kind Dell has.

Why a deal won't happen today

If Dell and Salesforce.com make so much sense together why don't they merge today? Simply put, the timing is off. Dell still has a lot of work to do on its turnaround project. Salesforce.com still has growth ahead. And the two parties are in a try before you buy stage. They have a tight partnership already so why would they toss in a distraction?

Before Dell entertains a big acquisition like Salesforce.com it would have to get its own house in order. The first thing on Dell's list is to find the balance between growing share and preserving profit margins. Another wild-card would be Benioff: Would he stick around?

Overall though there's a case to be made for Dell. I'd argue that Salesforce.com's future is to acquired by another company--Oracle, Google, Microsoft and even SAP. You might as well add Dell to that list too.